Robo-advisers will increasingly move towards hybrid models over the next year, combining the human touch with machine learning,
Scalable Capital, the Europe-wide robo firm, which has received financial backing from investment giant BlackRock, has just started offering telephone and face-to-face advice for clients who want to progress beyond an initial free session.
Nutmeg and Moneyfarm have both signalled plans to move in a similar direction, while Wealthify, which saw Aviva take a majority stake last year, won’t rule out taking this step in the future.
The Lang Cat communications director Mark Locke says: “We’ve seen the pendulum swing from fully face-to-face advice to everyone talking about fully automated models, and now it looks like the market is moving somewhere towards the middle.
“Firms are now looking to combine the best of what both traditional and digital advice has to offer. We are seeing this type of hybrid model emerge in the US and, over the next year or so, we expect many UK firms to move in this direction.”
Scalable Capital charges a fixed £200 fee for the consultation, and investors receive a full suitability report from one of its three London-based advisers.
The advice is restricted to the company’s own investment solution, which is based on a “value-at-risk” approach. This means that investors are risk profiled to determine the percentage of losses they are willing to endure, from 3 per cent to 25 per cent. Their asset allocation is decided on this basis.
On top of the advice fee, clients who choose to take up the firm’s discretionary service will pay 0.75 per cent for this, plus an average of 0.19 per cent in fund charges.
I’ve always said that the market would meet somewhere in the middle between full-fat robo and full-fat face-to-face
Scalable Capital chief executive Simon Miller says: “There was demand from existing and prospective clients to receive advice on whether they should transfer their existing investments to us, as well as from clients who just wanted to discuss their current financial situation.”
Candid Financial Advice director Justin Modray says: “This move by Scalable is a really positive one. Anything that helps to drive down advice costs for consumers is a good thing.
“With Nutmeg talking about this too, it suggests it’s harder to attract the wealthier and more profitable clients without that bit of extra reassurance from a human. Also, those types of clients have greater needs in terms of tax planning. It may be that firms are willing to offer advice as a loss-leader in order to get more
assets under management.”
Nutmeg chief investment officer Shaun Port says: “We are currently exploring a model where we could combine the best elements of digital wealth management and more traditional financial advice.
“We are in the early stages of development and are currently looking to recruit a financial adviser to support [Lisa Caplan] head of financial advice in this work. We expect to introduce a new service to existing customers this year and would potentially seek to grow the team to support customer demand.”
Moneyfarm chief investment officer Richard Flax explains the firm already carries out restricted investment advice, which is mostly automated, backed up with telephone support where necessary.
Flax says: “Moneyfarm’s individual advice permissions come with the portfolio-specific questions on time horizon and desired risk, which result in an investment portfolio.
“Ultimately, this is investment advice, and as a regulated business we need to ensure this investment is suitable for the individual. Under current FCA definitions this would be a recommendation, or restricted advice.”
Meanwhile, Wealthify is still mulling the possibility of offering an advised option to its users.
Chief investment officer Michelle Pierce says: “It is not something that is imminent, but we are considering it, and would certainly not rule it out.”
Investment Quorum chief executive Lee Robertson says: “I’ve always said that the market would meet somewhere in the middle between full-fat robo and full-fat
“Some of the early robo pioneers were adamant that advice wasn’t needed, and that they were going to disrupt the market and bring costs down. But they found that they lacked stickiness, and assets would come and go. It is harder to get larger portfolios as those clients want someone to hold their hand.”
Research by the Finance & Technology Research Centre suggests there is a huge market for the hybrid robo-advice model, which should not encroach too heavily on those traditional advisers who wish to continue offering a highly personalised face-to-face service to their wealthy clients.
Its director Ian McKenna says: “Our study shows there are 3.5 million households that have £2,000 or more left at the end of each month in disposable income after paying their bills. That is around 13 per cent of the population.”
McKenna says: “This would mean around 142 households per IFA, which would keep the whole of the adviser community occupied with this group alone. The next group is those who have £800-£2,000 left at the end of the month, which is around 6.2 million households, or 23 per cent of the population.
He adds: “After that there are around 7.3 million people, or 27 per cent of the
population, who have between £200 and £800 left each month. So 50 per cent of the population have up to £2,000 a month in disposable income, and that is the target market for these new ‘robo’ services.
“It’s a whole new market, and a huge opportunity to serve those
people for whom financial advice delivered in person by a highly skilled IFA is uneconomical.”